What Walmart’s Q2 Results Can Tell Us About Retail’s Challenges

Wal-Mart Stores Inc. reported a lackluster second quarter, and the challenges facing the retailer are indicative of many of the big-picture problems facing other stores as well.

The Bentonville, Ark.-based retail chain reported earnings per share of $1.08 for the quarter ending July 31. EPS was negatively affected by currency-exchange rates by 4 cents. Revenue remained flat for the quarter, totaling $120.2 billion. The company also reduced its expectations for the year.

From increased costs associated with omnichannel development to currency pressures, here’s what Walmart’s tough results can tell us about the state of retail now and the big issues facing retailers.

Currency-Exchange Rates

FX continues to hit retailers hard. Walmart’s operating income declined 10 percent, to $6.1 billion, in the most recent quarter, due in part to currency fluctuations. As long as the Chinese government continues to intervene with the yuan valuation to bolster exports — and until the Federal Reserve raises interest rates — the strong dollar has and will continue to be a challenge.

Upgrading the Brick-and-Mortar Experience

In-store sales remain the largest contributor to the revenues of Walmart and many other big-box retailers. Yet it’s a challenge to create an environment that is digitally integrated, convenient and, let’s face it, pleasant.

“The Walmart customer is looking for a better shopping experience, and that applies to checkout lanes, cleaner bathrooms and managers that understand the product. The service component is a big part of the conversation,” said Oliver Chen, a managing director at Cowen & Co.

Walmart is investing in its store experience — adding more shifts and managers on the floor and behind the registers. The company is also focusing more on the quality of its stores versus their sheer number, which the retailer had prioritized on for a long time. Planned openings of Walmart’s Neighborhood Market have been reduced to 160 to 170 new stores, versus 180 to 200 stores for the year.

Like Walmart, retailers like Target and Macy’s are rethinking their strategies in order to go where the consumer is and in a capacity that’s valuable, one of the reasons Target is refocusing on its U.S. stores and smaller urban models, and why Macy’s is testing e-commerce in China and developing an off-price channel.

Employee Wages & Happiness

Retailers have been under pressure politically and socially to raise their low employee wages. Walmart announced that salaries of associates will start at $10 an hour in June. T.J. Maxx and Gap have followed suit, raising their minimum starting salaries. The increased cost of labor and, for Walmart, the added shifts, will go a long way toward improving the store experience as well. And Walmart isn’t the first company to be taken to task for making employees miserable: 13 retailers are under investigation in New York for their on-call scheduling practices, while Amazon is under renewed fire after a New York Times story revealed its brutal work conditions.

Omnichannel Investment

As Walmart also spends more on developing omnichannel, one thing is also becoming clear: e-commerce is expensive, time-consuming and may not always pay off right away. For stores like Target, Macy’s and Kohl’s, which operate in the same sector, the big factor in e-commerce isn’t just having it, but investing in the channels that customers engage with.

“Walmart is well-placed here because it can use its store base to support online sales and can leverage that to ship thinks quickly,” said Chen.

Walmart is making a big push to develop its mobile platforms, as well as to grow its online site’s product availability and convenience, including testing free-shipping features and in-store beacons to drive mobile engagement. Even China is getting attention for a reserve-online-for-store-pickup feature.

“The changes we need to make require investment, and we’re pleased with the step we’ve taken. We made continued progress towards our plan this quarter. Even if it’s not as fast as we’d like, the fundamentals of serving our customers are consistently improving, and it’s reflected in our comps and revenue growth,” said Doug McMillon, president, CEO and director of Walmart.